Bernanke, Dudley say recovery hasn't produced big job gains

Federal Reserve Chairman Ben S. Bernanke and a top lieutenant said the US economic rebound has yet to produce a significant recovery in jobs, signaling there's no need yet to consider raising interest rates.

Bernanke, speaking to businesspeople in Dallas today, said the labor market contains "some of the toughest problems" for the economy and that he's "particularly concerned" about the number of people out of work for at least six months. New York Fed President William Dudley said in a separate speech that "we are not getting the job gains we would like to get."

The remarks reflect concerns by Fed officials at their meeting last month that the job market would restrain consumer spending. At the session, Bernanke and his colleagues reiterated interest rates will stay very low for an "extended period." Bernanke said in his speech today that the Fed's "stimulative" rates will aid growth.

"Our view right now is that the federal funds rate needs to be exceptionally low for an extended period," Dudley, who serves as vice chairman of the rate-setting Federal Open Market Committee under Bernanke, said in New York today. "We would like to see employment gains much more substantially than what we've gotten. What that tells us is that monetary policy needs to be on a very easy setting."

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Not everyone at the Fed shares Dudley's view. Kansas City Fed Thomas Hoenig, who's objected to the "extended period" language this year, said today that the Fed should raise the benchmark rate "sometime soon" to about 1 per cent to prevent asset bubbles from emerging. That level "would still represent highly accommodative policy," Hoenig, 63, the longest-serving Fed policy maker, said in Santa Fe, New Mexico.

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Dudley, 57, in a speech to the Economic Club of New York, backed using regulatory or supervisory tools over monetary policy to counter asset-price bubbles, saying interest rates aren't likely to work as well because they're "too broad."

At the meeting last month, central bankers left the benchmark rate target, covering overnight interbank loans, in a range of zero to 0.25 per cent, where it has been since December 2008.

The median estimate of analysts surveyed by Bloomberg News last month is for a Fed interest-rate increase in November.

"We are far from being out of the woods," Bernanke, 56, told the Dallas Regional Chamber. While the financial crisis has abated and economic growth will probably reduce unemployment over the next year, the US faces hurdles including the lack of a sustained rebound in housing, a "troubled" commercial real estate market and "very weak" hiring, he said.

More Debt

A Fed report released after the speeches today showed consumer credit in the US declined in February more than anticipated, indicating Americans are reluctant to take on more debt without further improvement in the labor market.

Borrowing fell $US11.5 billion, the most in three months, after a revised $US10.6 billion January gain that was twice as much as initially estimated, the Fed said. The decline in the February measure of credit card debt and non-revolving loans was worse than the lowest estimate in a Bloomberg survey of 34 economists.

The Fed last week completed plans to purchase about $US1.25 trillion of mortgage-backed securities and $US175 billion of federal agency debt to reduce home-loan costs. Central bankers are debating when to start selling the debt to reduce the Fed's balance sheet, which has ballooned to $US2.31 trillion from its pre-crisis level of about $US874 billion.

'Sustained Recovery'

"We have yet to see evidence of a sustained recovery in the housing market," Bernanke said. "Mortgage delinquencies for both subprime and prime loans continue to rise as do foreclosures. The commercial real estate sector remains troubled, which is a concern for communities and for banks holding commercial real estate loans."

Also, "cities and states are struggling to maintain essential services," he said.

Some of the economy's "toughest problems" are in the job market, Bernanke said. US employers added 162,000 jobs in March, the third gain in five months and the most in three years. The unemployment rate held at 9.7 per cent, close to a 26- year high.

"Hiring remains very weak," Bernanke said. "I am particularly concerned" that more than 40 per cent of those without jobs have been out of work for at least six months, because such spells may erode skills and reduce the workers' income and employment prospects, the Fed chief said.

The economy expanded at a 5.6 per cent annual rate in the final three months of 2009, led by inventory restocking, according to Commerce Department figures released last month. That pace probably slowed to 2.8 per cent in the first quarter of 2010, according to the median estimate in a Bloomberg survey of economists last month.